Northrop Grumman [NOC] on Thursday posted lower net income in its fourth quarter stemming from a new tax reform law that went into effect on Jan. 1 and a discretionary pension contribution but the company said that lower taxes will result in benefits to employees, investors and capital investments.
Net income dived 66 percent to $178 million, $1.01 earnings per share (EPS), from $525 million ($2.96 EPS) a year ago, due to $300 million ($1.71 EPS) in tax expense related to the new law and a voluntary $500 million pre-tax contribution to the pension fund that snipped $9 million (5 cents EPS) from the bottom line. Excluding the impacts from the tax provision and pension payment, per share earnings of $2.82 topped analysts’ estimates by 8 cents EPS.
The quarterly results were also impacted by transaction costs related to the pending acquisition of Orbital ATK [OA], which remains on track to close in the first half of this year, and state taxes.
The new tax law is expected to reduce the company’s effective tax rate this year to about 19.5 percent, which will bolster operating cash. Northrop Grumman is forecasting free cash flow in 2018 between $2 billion and $2.3 billion, versus $2 billion in 2017 before the after-tax effect of the voluntary pension contribution.
Capital investments that drive long-term growth and improve customer results remain the company’s top priority for cash deployment, Wes Bush, Northrop Grumman’s chairman and CEO, said on Thursday’s analyst call. The company plans to increase its capital expenditures this year to about $1 billion, about $100 million higher than 2017.
Employees will benefit annually by additional payments to their retirement accounts based on the company’s competitiveness and overall performance, Bush said, adding that the potential amount this is $1,000 per employee except senior managers that participate in an annual incentive plan.
The company will also continue a competitive dividend, and announced a 10 percent hike to its quarterly dividend, which will increase a dime to $1.10 per share on March 21. The announcement was made five months before Northrop Grumman typically raises its dividend, and it said the shareholder payments will be evaluated again in May as part of the normal cycle.
Sales in the quarter increased 4 percent to $6.6 billion from $6.4 billion a year ago, with work on classified programs, likely the Air Force’s B-21 stealth bomber program, fuselage work on the F/A-18 and F-35 fighters, sensors for the F-35, the Fire Scout and Triton unmanned aircraft systems, and air and missile defense programs behind the stronger top line.
Operating income at the segment level was down overall with Aerospace Systems off from a year ago when it recorded a gain from a property sale and Mission Systems down on program mix and lower performance. The overall segment operating margin rate was 10.9 percent, down 1.2 percent from a year ago.
For the year, sales increased 5 percent to $25.8 billion from $24.5 billion in 2016, while net income slipped 9 percent to $2 billion ($11.47 EPS) from $2.2 billion ($12.19 EPS).
The outlook for 2018 is sales of about $27 billion, with gains forecast for Aerospace Systems and Mission Systems, and some softness at Technology Services. Per share earnings are expected to be between $15 and $15.25 and segment operating martin in the low to mid-11 percent range.
The F-35 program will account for between 9 and 10 percent of the company’s overall sales in 2018, Ken Bedingfield, Northrop Grumman’s chief financial officer, said on the call.
Since winning the classified B-21 program, Northrop Grumman only provides backlog as part of its year-end results. Backlog at the end of 2017 stood at $42.9 billion, with $22.4 billion funded, versus total backlog of $45.3 billion at the end of 2016.
Kathy Warden, Northrop Grumman’s president and chief operating officer, who is overseeing the acquisition of Orbital ATK and its eventual integration into Northrop Grumman, said on the call that once the deal closes, the new business will become Innovation Systems.
Blake Larson, who is currently COO of Orbital ATK, will lead Northrop Grumman Innovation Systems, Warden said. The current heads of Orbital ATK’s operating sectors will retain their roles, she added.